Netflix - Lunar Capital

The Legacy of Disney

Last week, Disney released its Q1 2025 financial results, reporting a 7% year-over-year increase in total revenue to $23.6 billion. This growth was primarily driven by the entertainment segment, which includes both linear television and direct-to-consumer (DTC) services. Operating income rose 15% year over year to $4.4 billion, mainly due to a sixfold increase in operating income from the DTC business.

Despite the growth in streaming, Disney continues to face challenges in its linear network segment, where revenue has been declining as audiences shift toward digital platforms. However, linear TV remains a major contributor to profitability, generating over 61% of the entertainment segment’s operating income. In contrast, the DTC segment, while rapidly growing, currently contributes just over 26%. Competitors like Netflix and Amazon, which entered the streaming space earlier, have been able to capture market share from traditional media players like Disney.

A key strength for Disney lies in its library of intellectual property, which has been developed in-house development and through acquisitions. This content portfolio fuels multiple revenue streams across its business segments.

One of the most effective ways that Disney monetizes its IP is through its Parks and Experiences division, which includes theme parks around the world. This division generated $8.9 billion in revenue—up 6% year over year—and $2.5 billion in operating income, a 9% increase. Notably, this division accounts for more than 55% of Disney’s total operating profit.

Looking to further expand its global footprint, Disney recently announced plans to open a new theme park in Abu Dhabi. While Disney will lead the design of the park, construction will be funded by local partners. In return, Disney will receive a share of the revenue generated by the park.

The Parks and Experiences segment may be particularly vulnerable in the event of an economic downturn. A potential recession could dampen consumer spending on travel and leisure, impacting park attendance and profitability.

Disney also faces intense competition in the entertainment space. Netflix is singularly focused on its core DTC business and does not have to manage legacy media operations or a theme park division. This focus may give Netflix a strategic advantage as the media landscape continues to evolve.

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Netflix: The Saga Continues

Weekly Stocktake / By VCS Agency

By the end of 2024, Netflix had over 300 million subscribers in 190 countries. Netflix estimates that this translates to an audience of roughly 700 million people. Last week, Netflix released their Q1 2025 results, reporting revenue of $10.5 billion, up 12.5%. Operating income was $3.3 billion, representing an operating margin of 31.7%, up from 28.1% in the same quarter last year. Netflix has set a goal of doubling its current revenue by 2030.

Over the last few years, Netflix has steadily increased the prices for their services. In the US, the price of the standard plan rose from $13.99 in 2019 to $17.99 this year, a 28% increase. Netflix has also kept its content spending relatively stable, which has allowed the company to increase profitability substantially. Two years ago, Netflix cracked down on password sharing. According to Netflix, this had a net positive impact, as more people created their own accounts compared to those who left the platform entirely.

A core pillar of Netflix’s strategy is to fund and create original content. This approach gives them full creative control and rights, enabling them to produce more content centred around their intellectual property without incurring substantial leasing costs. Netflix has had significant success with this strategy, creating shows like Stranger Things and Squid Games, which have become culturally significant shows with large fanbases. Netflix has also refused to lease its content to other platforms. This strategy has helped Netflix draw in and retain customers despite the intense competition.

However, Netflix still faces stiff competition from other streaming platforms, linear TV, and the entertainment industry as a whole. The risk is that Netflix might lose its ability to engage subscribers, leading to non-renewals. However, as it stands, the company is in a strong position. The market values Netflix highly, with a price-to-earnings ratio of over 45.

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Net Flicks on Flicks on Flicks

Weekly Stocktake / By VCS Agency

Three years ago, Netflix’s stock price experienced a significant decline of more than 70% from its peak reached at the end of 2021. This decrease was driven by the loss of subscribers for the first time in Netflix’s history. Analysts also argued that Netflix was unable to maintain its market leadership and effectively counter the competition. Concurrently, inflation in the United States was rising to levels not seen for decades.

However, last week, Netflix achieved new stock price highs, with the stock closing at $977 on Friday. Netflix ended the week with price-to-earnings ratio of just over 49 and a market capitalization of $417 billion.

Netflix saw an increase in their number of subscribers by nearly 20 million in Q4 2024, reaching just over 300 million subscribers worldwide. Revenue for Netflix rose by 16% to $10.24 billion, while operating profit grew by 52% to $2.3 billion. The significant rise in profitability was attributed to operational leverage. Netflix managed to expand its subscriber base without a proportional increase in operating costs. The below graph shows the change in profitability for Netflix over the last two years.

Why is there so much positivity behind Netflix’s business?

Netflix is uniquely positioned to concentrate their efforts exclusively on streaming, unlike competitors in the entertainment sector who balance their newer streaming initiatives with their currently-profitable legacy assets.

Other competitors, such as YouTube (a subsidiary of Alphabet) and Amazon Prime, have primary businesses in areas such as search and e-commerce that demand extensive company resources in terms of effort and capital. Consequently, these companies may not place a high enough priority on their streaming business, potentially resulting in a loss of market share.

Netflix also has an extensive lineup of new shows and movies scheduled for release this year, as part of its strategy to further expand its revenue base. The company has also introduced advertising packages in numerous markets and plans to scale these efforts throughout the year. Following the success of live events such as the Jake Paul vs. Mike Tyson fight, Netflix is exploring opportunities to develop its live events segment, focusing on occasional events rather than expensive, year-long sports leagues.

However, despite their recent successes, Netflix faces significant competition, increasing costs, and shifting consumer preferences. A few missteps could considerably impact the company’s performance.

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What’s Up Walt

Weekly Stocktake / By VCS Agency

The Walt Disney Company holds a diverse portfolio of brands and assets. These include Disney, Marvel, Star Wars, Pixar, 21st Century Fox, sports broadcaster ESPN, and Disney Experiences. Since the onset of the pandemic, Disney has faced challenges in maintaining its previous level of success. The segments have not always done well simultaneously.

Disney’s multiple business segments that drive the revenue for the company:

Experiences – includes their theme parks and Disney cruises.
Entertainment – includes their streaming platforms, linear tv assets, and box office hits .
Sports – includes their ESPN assets.

During the Covid pandemic, Disney’s streaming service, which was in its early stages, contributed to the company’s growth. The strategy was to leverage its extensive catalogue of creative and entertainment Intellectual Property (IP) to attract more users to its brand and transition users from its traditional linear television business to a more streaming-focused model.

Its Direct-to-consumer business (DTC) which includes Disney+ and Hulu, currently have just under 175 million paying subscribers globally. Average revenue per user (ARPU) per month in the United States for Disney+ is $7.70, compared to Netflix, which has an ARPU of $17.06. Netflix’s streaming service also boasts 282 million subscribers globally, over one hundred million more than Disney’s streaming platform.

Growth at Disney for its DTC business has slowed significantly since the peak during the Covid period. Revenue for the quarter for its DTC business increased by 16% to $5.8 billion. A notable development is that Disney’s operating income for their DTC platform was positive at $0.3 billion for the current quarter, an improvement from a peak loss of $1.5 billion in Q4 2022.

Disney’s parks and experiences business had the highest operating income among its segments, reaching $1.7 billion for Q4 2024. The segment performed well following the COVID-19 pandemic due to increased demand. However, with consumers facing financial pressure, the experiences business saw a year-over-year growth of only 1%, totalling $8.2 billion for the the quarter.

Disney’s CEO Bob Iger has stated that the current focus of Disney is to return creative control to their various brands and segments. He asserts that producing quality content for audiences encourages engagement with related content, whether from their streaming platform or their experiences business. It remains to be seen if Disney can effectively compete across all its business segments in the extremely competitive entertainment industry.

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